On Feb. 14, lawmakers, insurers, employers and others gathered in Sacramento to discuss the troubled state of California’s workers’ compensation market.
The Assembly Insurance Committee Hearing on Workers’ Compensation was chaired by Assemblyman Thomas M. Calderon, with the goal of “establishing a baseline of information to allow a better understanding.”
“The recent energy crisis demonstrates that we can’t put off these issues simply because they are daunting and complex,” Calderon said. Unfortunately, more than half of the agenda was indeed put off, due to a Democratic caucus that would be taking place. But during the testimony presented, a very clear consensus emerged: namely, that there is a problem in California’s workers’ comp system, and that action must, and will, be taken.
Insurance Commissioner Harry Low prefaced his remarks with a warning that: “Today you will hear some difficult news. Foremost on my mind are the 1999 statistics that show for the vast majority of the workers’ compensation industry, pure losses exceeded premiums. And you will hear that investment income earned by that premium-by no stretch of the imagination-could fill the gap.”
Steve Smith, Director of the Department of Industrial Relations, also minced no words: “Workers’ comp means that we failed-it means the system that we assembled didn’t work and someone got hurt,” he emphasized. “We need to protect our employers and employees. “The Governor wants to sign a bill this year. It is clear that our benefits are too low, and the costs are too high-we must work on both issues.” Smith indicated that the DIR would strongly prefer a consensus; however, it would take action with or without that consensus. Smith said that one of the major challenges lies in costing the various proposals and assessing their impacts. “We need to improve the administration of the system, make the audit system more efficient, and reduce frictional costs in the judicial system,” he said. Dick Gannon, administrative director of the Division of Workers’ Compensation, gave a historical perspective leading up to the current crisis.
Approximately 900,000 claims are made in the California system each year, according to Gannon, and out of these claims, there are 20,000 disputed cases each year. “The cost to employers totaled more than $11 billion in 1999,” Gannon said. “Even through this long period of growth in employment, the number of claims has not been rising, but the cost per claim has gone up.” Indeed, this seems to be a key factor in the overall problem.
When Calderon questioned Gannon on this point, Gannon responded that: “Generally, claims handling practices have had some problems-more instances that required penalties from 1996-99.” Yet, insurers argue that penalties are already severe in this area, as Calderon pointed out. Gannon insisted that random DWC audits show mistakes, unpaid indemnity benefits, delays and other problems.
“We’ve established standards that must be upheld. We are working on better ways to identify poor claims handling practices, lessening or eliminating penalties for those that pass an initial audit review. For those that fail, penalties would be increased.”
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